Effective Sale-Leasebacks

By Guy Ponticiello, Managing Director & Leader of the Corporate Finance & Net Lease Practice in the Capital Markets, Jones Lang LaSalle Inc.
Corporations considering taking advantage of the current window for sale-leasebacks should carefully evaluate their financial and operational goals and negotiate a deal that best aligns with them.

In general, the market for sale-leasebacks is the best it has been in many years. Capital rates are low, interest rates are very low, lenders are increasing available funds and commercial property transactions are picking up in most major markets. There is not enough sale-leaseback product to satisfy current demand, creating even better conditions than those during the previous peak for sale-leasebacks in 2006.

Every sale-leaseback is different; there are no set rules. Corporations considering taking advantage of this window should carefully evaluate their financial and operational goals and negotiate a deal that best aligns with them.

Among the things they should keep in mind:

Financial return or flexibility—which is more important? The company is unlikely to receive both top price and maximum flexibility as a lessee in a sale-leaseback because one directly affects the other. The more space it is willing to lease back and the longer the lease term, the more a buyer is motivated to increase their offering price. Depending on the asset and the location, the seller generally needs to lease back a property for at least 10 to 15 years to obtain favorable pricing. And of course, their bargaining clout increases if the occupant is willing to lease back the entire space, relieving the new owner of having to seek additional tenants.

Before going to market with a sale-leaseback offer, the company should consult with the stakeholders in their organization to determine not just optimal but worst-case acceptable metrics for both financial return and lease conditions, rather than trying to decide this in the heat of a deal.

Be picky about lease structure and terms: There are lots of ways to structure a lease, and the company should choose the one that best suits their goals, whether it be a gross lease (relieving them of responsibility), a net lease (in which they pay the cost of some or all variables including maintenance, taxes and insurance)or a bondable lease (which binds them to pay full rent for their lease term even if the building is uninhabitable following a casualty or is otherwise condemned or is resold by the buyer).

The greater their responsibility under the lease, the higher the sale price they will likely receive. Again, they will need to weigh financial gain against the amount of risk their organization is willing to take. They should consider also negotiating lease terms that maximize flexibility, such as automatic renewal options, expansion and contraction options, rental rate guarantees, even a right of first offer/refusal if the property is resold by the buyer.

Consider the financial impact on the affected business unit: The financial return from a sale-leaseback deal may be offset by the harm it does to occupier productivity if the impact on the business is not carefully evaluated. They should sit down with appropriate business unit leaders to determine exactly what must remain in place so the arrangement is non-disruptive to their operations and insist on those conditions in negotiations.

Don’t try to see chicken in the rain: As noted, timing the sale-leaseback for optimum market dynamics is critical. The company should study conditions rigorously to make sure they enter the market when the conditions are best for a sale-leaseback in their particular market, at that particular time.